Middleby Corp (MIDD) 2007 Q3 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to Middleby Corporation's third quarter earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you.

Mr. FitzGerald, you may begin your conference.

Good morning, and thank you for attending today's conference call. I am Tim Fitzgerald, CFO of the Middleby Corporation. Joining me today is Selim Bassoul, our Chairman and CEO. I have some initial comments about the Company's 2007 third quarter results and then we'll open up the conference call for questions and answers.

We were pleased to report our 23rd consecutive quarter-over-quarter record net earnings. The quarter results included the impact from the four acquisitions completed during the year, including Jade Range acquired in April; Carter-Hoffmann acquired in June; MP Equipment acquired in July; and Wells Bloomfield acquired in August. The third quarter results also included the impact of a work stoppage that occurred at the Elgin, Illinois conveyor facility. That work stoppage began in May, 2007 after the unionized workforce failed to ratify a final contract proposal of an expired collective bargaining agreement. The sales at the Elgin, Illinois facility in the third quarter were $2.7 million lower than the prior year as a result of the work stoppage.

During the third quarter, the Company entered into a new five year collective bargaining agreement. The new union agreement included a voluntary retirement program offered to the union employees, which resulted in one-time payments of approximately $900,000 during the quarter or $0.03 per share. We are in process of reorganizing production processes at this facility, which will continue to have some impact on the fourth quarter results. However, we anticipate gains in production efficiencies at this facility as a result of these actions as we move into 2008.

Net sales in the third quarter increased 31.7% to $136 million as compared to $103.2 million in the third quarter of 2006. Sales from acquisitions amounted to $26.6 million and accounted for 25.8% of the sales growth for the quarter. Excluding the impact of acquisitions, sales organically grew 5.9% as compared to the prior-year third quarter. This included sales growth of 8.3% from the Commercial Equipment Group offset by a 7.6% reduction in sales of the Food Processing Equipment Group. The 8.3% sales growth in the Commercial Foodservice Equipment Group includes the impact of the work stoppage at the Elgin, Illinois facility. Organic sales of Commercial Foodservice Equipment, excluding the conveyor oven products affected by the work stoppage, rose 14.4% during the quarter, reflecting very strong sales at our Blodgett Oven division, which rose 23%, and our Southbend Range division, which rose 12%.

At our Food Processing Equipment Group, we realized a reduction of 7.6% sales for the quarter. And this reduction was due in part to acquisition-related initiatives put in place in 2006 to increase profit margins by enhancing pricing controls and eliminating unprofitable sales. These initiatives have resulted in a significant improvement in profitability at this division over the prior year, and EBITDA margins at this business have reached a sustainable level of 20% as compared to 5% at the time we acquired the business.

At Middleby Worldwide, our International Sales and Distribution division, sales increased 7.4% from the prior-year quarter and continued to be affected by the disruption in conveyor oven production due to the work stoppage, which impacted availability of the product. Sales growth for the quarter was primarily driven by increased sales in Asia and into Europe.

The gross profit increased from $40.5 million to $51.4 million on higher sales volumes, but the gross margin rate decreased from 39.3% to 37.8%. The gross margin rate reflects the impact -- or the dilutive impact of recent acquisitions, which an aggregate had gross margins of approximately 25%. Excluding the impact of the recent acquisitions, gross margins would have been slightly over 40% for the quarter. Although we expect the recent acquisitions to continue to dilute margins over the next several quarters, we should see some improvement at these operations in the fourth quarter and moving into next year as we integrate those businesses.

Selling expenses increased $3.5 million to $13.5 million. General and administrative expenses increased $2.9 million to $12.5 million. The increases in selling, general and administrative expenses were largely attributable to expenses associated with the recently acquired companies. General and administrative expenses also included the $900,000 charge associated with the voluntary retirement program for the Elgin union. Selling, general and administrative expenses will also increase in the fourth quarter as compared to the third, as the third quarter acquisitions did not represent a full quarter. So, we'll have a full quarter impact of expenses in the fourth quarter and moving forward.

Non-operating expenses were $300,000 favorable to the prior year quarter, primarily due to favorable realized and unrealized exchange gains which resulted from the strengthening of foreign currencies against the U.S. dollar. The provision for income taxes of $10.1 million was reported at a 42% effective rate. This compared to a $7.3 million provision and a 37% effective rate in the prior-year quarter. The increased tax rate reflects an increase in tax reserves for state exposures, which are due in part to growth of the Company through acquisitions. We anticipate the tax rate will remain at a higher effective rate in the fourth quarter.

Net earnings for the 2007 third quarter increased 15% to $14.1 million from $12.2 million in the prior year quarter. Diluted earnings per share increased 12% to $0.83 per share from $0.74 per share in the prior year quarter. As reported in our press release, the impact of acquisitions were neutral to earnings per share for the third quarter. However, we expect these acquisitions to be accretive in 2008.

Now turning to the balance sheet and third quarter cash flows, the net change in the balance sheet accounts reflect the impact of the second and third quarter acquisitions. The acquisition of the four companies added $14.7 million to accounts receivable; $16.5 million to inventory; $8.3 million to property, plant and equipment; $7.7 million to Accounts Payable; and $12.1 million to accrued expenses. Additionally, we recorded $30 million of goodwill and $18.5 million of other intangible assets associated with these acquisitions. Other changes in balance sheet accounts primarily reflect normal variations driven by seasonal working capital needs.

Cash flows provided by operating activities amounted to approximately $23.2 million during the third quarter and $45.6 million for the first nine months of the year. Operating cash flows were utilized to fund the acquisition of Jade Range, Carter-Hoffmann, MP Equipment and Wells Bloomfield, which an aggregate amounted to $67.9 million. The Company also had capital expenditures amounting to $600,000 during the third quarter and $1.7 million for the first nine months of the year associated with the replacement and upgrade of manufacturing equipment and facilities improvements.

Total debt increased during the quarter to $107.8 million from $85.4 million at the end of the second quarter, and $82.8 million at the beginning of the year. This increase reflects the funding -- the $67.9 million of funding for the acquisitions.

We are very pleased with the current progress made at the acquisitions to date. This includes the three acquisitions in the Commercial Foodservice sector and one acquisition in the Food Processing sector. The acquisition of Jade, which was the first one of the year reported back in April, has progressed very well within the first six months. And we have reported EBITDA margins in excess of 10% during the third quarter as compared to 10% EBITDA losses that were being incurred prior to our acquisition of this business. The initial reorganization initiatives at this business unit have been completed. And we anticipate continued improvement and profitability at this operation over the next several quarters.

We are also very pleased with the progress made at our more recent acquisitions of Carter-Hoffmann, MP Equipment, and Wells Bloomfield. These operations reported operating margins less than 5% for the quarter. However, we are in process of implementing profit improvement initiatives and expect improvement in the fourth quarter. By year-end, we anticipate all these businesses will reach a run rate in excess of 10% operating margins by the year-end. We expect to, as indicated earlier, reach 15% by the second half of next year. We anticipate these acquisitions will be accretive to earnings in 2008.

That's all for our commentary. Could you please open the call to questions now?

(OPERATOR INSTRUCTIONS). Mark Grzymski, RBC Capital Markets.

I guess my first question is on growth. And of course, the organic growth rate when you pull out the acquisitions, et cetera, is pretty strong. I know the sentiment out there is sort of mixed. So I'm curious what you guys are hearing from first, your major customers and then secondly, from your channel -- your distribution partners?

I'm going to address that, Mark. I think this is a question most probably is on the minds of many, many investors. And it has to do with everybody is reading that restaurant chains -- the growth in the restaurant chains and the economy at large is slowing.

But I have to tell you that while restaurant chains have begun cutting back on unit expansion -- and they've been doing that for the last two to three years -- they have been devoting more resources and efforts to boosting what I'd call same-store sales or comparable store sales. And they are doing that with something different. They are no longer opening up as many new stores. They are enticing customers and increasing -- trying to increase their revenue with new menu mix changes.

Give you just simple example on that, number one. So you have menu changes, which have become a lot -- a driver of equipment purchases a lot faster than store opening. Give you an example. Yum's have -- Yum brands have been adding WingStreet Chicken to its Pizza Hut. They already have 1,000 locations where they have WingStreet in addition to offering pizza at Pizza Hut. And they are accelerating those WingStreet throughout the country to encompass that 5,100 Pizza Hut chains.

Let me talk about Dunkin' Donuts. Dunkin' Donuts just is now promoting its new bacon lovers omelette. And on that they are introducing a breakfast sandwich, which includes an omelette and assorted vegetable and three slices of peppered bacon and cheese, served on a fresh croissant. Definitely that cannot be done without using new equipment. In the case of Pizza Hut, they have to buy fryers and other type of equipment. In the case of Dunkin' Donuts, they have to buy more ovens to prepare those type of menu mix.

Number two, there's a lot of unit remodeling. We're seeing a significant amount of remodeling taking place, whether it's at the Applebee's or Ruby Tuesday's or fast-casual Zaxby's or concept repositioning completely.

So I can tell you, that if you are a company like Middleby, focused on the fast-casual and the quick-serve and the casual dining, you're going to continue growing. So, we're not concerned, to answer your question, on the growth moving forward. We've always been saying that we will accelerate -- we'll be higher than the industry growth. And I think we're well positioned to take advantage of the menu changes, unit remodeling and concept repositioning.

Beyond restaurants, there is a significant growth in several foodservice sectors such as -- I hate to admit it, but prisons happen to be growing in our country more and more. And the food there is becoming more part of making sure that the prisoners are fed with nutrition. And there is a lot of equipment going into new prisons.

Schools -- at the level from all levels from primary to K-12 and college-level are all opening up new type of cafeterias and adding menus. Give you a perspective -- many school districts are now adding what you call a breakfast menu, which is launching a breakfast menu program to ensure that all students have an opportunity to eat breakfast. And we're seeing significant amount of equipment geared for breakfast. And I look at the convenience store business, it's another segment that we believe that's going to be growing with more sophisticated equipment and counter-lining equipment.

Okay, thanks. That was very helpful and I guess that's in line with what you're seeing from a lot of the large chains since their spending really hasn't slowed down.

And then just lastly, so I don't monopolize time here -- acquisitions -- you guys are probably the only ones making acquisitions, especially at this pace. You have five that you're trying to digest right now. Just curious, are you guys looking to slow down a little bit? Maybe generate some free cash flow, bring up margins, take down your debt? Or are you still seeing so many acquisitions out there that your appetite is still very strong?

We still think that there's a lot of opportunity for acquisitions. We're operating in fragmented businesses and we're going to be opportunistic. So, when we see good opportunities come along and then we'll be prepared to act on them.

I'm going to answer the question differently. We continue to see the fast casual segment in our business to be a big segment. It's expected, according to Technomic, to grow in the 9% to 10% despite the malaise in the economy. People are upping up, spending the $2 more to go to a fast-casual. We have been a player in the fast-casual since 2001. We will continue looking at acquisitions that allows us to look at that segment. We need to continue looking at opportunity where we can complement our product in that segment.

Thanks, guys. I'll jump back.

Peter Lisnic, Robert W. Baird.

Tim, just some numerical questions first, I guess. The $900,000 that you booked in the quarter -- if I remember right, in the second quarter you were talking about a $2 million hit. What was the difference there?

I think is -- a couple of pieces. One was -- in the number I had is really comprised of two things -- one was the -- there was, I guess, a bonus, if you wanted to call it that, that was paid for approving the contract. And that ends up getting capitalized and taken over the period of the contract, the five years. So, originally I anticipated that might be a charge, but that actually gets amortized over a period of time. So, there was actually more paid out but the amount that was actually expensed during the quarter was $900,000. So, my estimate was high and then part of it was capitalized for expense. So that's the reason.

All right. So, that's over like a five year period?

Yes.

Yes. Okay. Any idea of what increased steel costs might have cost you on the gross margin line?

It's probably something approaching 1%.

Okay. And then if you look at the top line organic growth, is there a way that you could break that up between price and volume?

No, I'm not prepared to do that on this call.

Okay, I'll ask you on the next call, then.

Okay.

Selim, I'm interested by your comment on Dunkin' Donuts or really counter-line equipment, which I personally always thought was potentially lower margin product and not really -- I don't want to say it's not your core competency because you seem to be pretty good at all the areas that you focus on, but has that become a strategic choice for you or a strategic change? I just -- hearing counter-line equipment and that being a potential big market for you, it just seems to be a bit different than what I thought about the operating strategy of the Company.

Well, counter-line equipment does not need to be light-duty. It does not need to be cheap. Counter-line equipment can be pretty expensive. The key with counter-line equipment is not a cheap piece of equipment; it's what I call ability to be -- to cook in a smaller space, to be about to be versatile. Those are type of equipment we would be looking at.

I look at two segments where I see a lot of this starting to be the next trend or be in convenience stores. And a lot of those convenience stores have become very sophisticated as they added premium coffee. As they've added more beverages, they seem to be also expanding their hot meal menu. And for that they can't go and buy definitely my platinum sectional line. Even if they would like to, there's no way they can fit that either through code, through location, through [BTU's]. So there has been a lot of emphasis on what I call very reliable, high margin counter-line equipment that targets convenience store business of which at this moment will not apply at all. And we would like to go after that segment as we see people migrating.

Similar thing -- what made Middleby successful is the fact that we anticipate trends. And we see convenience stores becoming the next trend as they become -- their locations are superb, as people continues to now -- the job growth is very, very strong. And I think a lot of people for menu -- for lunch they go to a convenience store to either get a good beverage or they get their breakfast. And in many of those places we see that segment to be something we'd like to go after.

Okay. Do you think you're behind in that segment at all? I know there's clearly one quote/unquote competitor that's out there talking about relationships with 7-11 and Sara Lee and just really focusing on that market. Do you feel like you're behind in that at all?

Not at all. I think the company you're talking about is not a competitor of ours at this moment. We see a different approach, a different menu. They are more focused on basically toasting and reheating products and cooking. We're looking at truly taking more protein type of products and cooking them, whether it's burgers or chicken and cooking them. We're talking about griddles and charbroilers that are dedicated to this.

Other things where we see significant synergies between the countertop equipment -- including that company you talked about -- is in our ventless hoods. I think codes are getting a little bit tighter. I think they're going to be tighter even at Subway. And they will be most probably the question of codes and building zones and what's emissions of wax or grease or whatever. I think our ventless initiative through the acquisition of Wells is superb.

Okay. That is very helpful. Thank you both.

Jamie Clement, Sidoti & Co.

I'm not sure, Selim, whether you should take this one or whether this might be for Tim. But Selim, in response to your answer to a previous caller's question talking about the restaurant market and -- I mean, you pretty much addressed the revenue side of the equation for them. But isn't your emphasis on energy savings another issue that's probably at play here?

And then second follow-up question maybe to Tim, I mean are there -- I suspect but I'm not sure that there are certain circumstances where the depreciation on a new piece of energy savings equipment that a restaurant chain would have to expense is actually a lot less than the energy savings they're getting. So in other words, it's actually accretive to their P&L. Is that something that you kind of are aware of among your customer base as well?

I'm going to answer the first question about restaurants. Irrespective of what the bottom lines are of the restaurant, irrespective, and I have to tell you that there is a trend that is unstoppable right now; unstoppable. Which is the trend -- the conversion from trans fat oil to trans fat-free oil. That is unstoppable. That has nothing to do with economics. This is something where definitely there is a push from legislators, there is a push from consumer activism to say, I want to eat -- I want my fries or my onion rings or my chicken nuggets to be in a trans fat-free oil. So, Taco Bell, KFC have already switched. Wendy's, have already switched. Burger King has announced that by end of 2008 they will be switching. And now companies like Buffet's, they are all converting to 0 trans fat frying oil by the end of 2007. So I could tell you, this is not happening only in one place. It's happening across the board.

This has nothing to do with economics. Our Rocket Fryer, which will be launched in -- well, it just now got unveiled at the [Napan] show in October in Atlanta; will most probably go full speed, and in the third fourth quarter of '08, will definitely help all those chains reduce their cost of the conversion. So we're betting that starting in some time in the latter part of third and fourth quarter of '08, we're going to be having significant momentum on the Rocket Fryer and [observe] of course in '09 and '10. So that has nothing to do with economics of what's going on.

I think there is another thing that is happening with respect to energy. I think as commodity prices continue going up, big chains are not closing restaurants. They are not saying, I'm going to shut down until my half prices go down. They are finding other ways; every penny they can save, by basically recycling their old equipment with new energy saving equipment, by looking at versatile equipment, by cutting labor out of the store. And we're getting a lot of people saying to me, how can I [cut] labor? And that is where the [resimulizers] had been very well accepted. Our [resimulizer] equipment have been very much -- we don't talk about it much and it's one product that we introduced in '07 that is doing very well. Because it cuts labor and it increases speed by cutting labor.

So a lot of those big chains in the fast-casual chains are finding ways in getting educated to switching to that equipment. Tim, would you like to add anything else?

I think that pretty well covers it. So, I mean, from -- you know, Jamie, your question from an accounting standpoint, I guess, a lot of the equipment out there is largely depreciated. And we're focused on accelerating the replacement of that equipment. So, between energy, labor, maintenance costs or other costs like oil with the Rocket Fryer, that pays for itself.

Okay. Fair enough. And just last quick question, Selim. With the acquisition of Jade, obviously there's a little -- there's a piece of residential business there. Housing markets slowing, all of that kind of stuff, I mean is -- I know that when you made that acquisition you'd sort of discussed the residential market as a longer-term opportunity. Are you in the process of just sort of evaluating your strategy there? I mean, I would imagine with the housing market, there's no sense of urgency at this point.

We are going full blast on it.

Oh, you are? Okay.

We are. Again, it's a small (inaudible) minor at this moment. It's an insignificant, immaterial even piece of our discussion but it's something that we look at and say, remember, from the day one I said we're not going to be a competitor to a Viking or a Wolf. We don't have the capacity to do that. We felt that this is a product that's synergistic with us and it gives us some high margins.

And we introduced a new classic line. When we took over that business, they had several type of products -- they were not focused -- we focused it on the classic line. The classic line is our range looks very much like the commercial with all the features of self-cleaning and whatever for the restaurant and has all type of colors. In addition, what is unique about us is the fact that you can have a combination of [Wok] range and convection oven and the charbroiler and teppanyaki griddle in your home, similar to a restaurant; all in one piece.

In addition, we are going full blast to introducing a -- ovens. And we're going to be introducing by generally wall ovens that are very different. They will be residential but commercial looking. Very, very unique in the way they look and the way they open and closed. Remember, we are the leader in convection oven in the world. And so we understand convection oven very, very well. So we are bringing the convection oven expertise that we have on the commercial into that wall oven that you see in your home. We say all looks the same; they all drop down, the door drops down and opens up. We're changing that concept. So we've invested -- in our R&D money that you spend, that you've seen, there is money spent on our residential.

Okay, okay. Very good. Thanks very much for your time.

Tony Brenner, Roth Capital Partners.

Two things. I too had a question about residential. Is this an area that you will over the short term look to leverage with acquisitions given the right opportunity or than a longer-term idea?

I would say it's a longer-term idea for us. The reason is at this moment we're pretty busy doing extremely well with our food processing business and our foodservice business. We are going to introduce 11 new products. We introduced 11 new products in '07. We'll introduce 11 new products in '08. We're busy. We have a lot of things going on, on our plate. The only thing we did is we needed to upgrade the look of our residential organically, internally. And that is what we're doing. And I have to tell you, the engineers at Jade and our distributors and dealers have helped us figure out a way to differentiate ourselves from the 10 other residential players by being a niche play and being successful in that segment. And we're very, very happy of what we're doing. So we don't need at this moment to go and acquire anybody on the residential side.

Secondly, Selim, you discussed earlier about how the domestic equipment market is barely benefiting from new store expansion which is proceeding very slowly, but it's all a question of new products and remodeling and dual brands and other factors. Your sales growth in international markets is quite strong and is expected to remain strong. And I'm wondering how much of that growth reflects new store expansion in the various geographic segments? And how much is replacement or new sales due to some of these same factors you talked about in the U.S.?

I would say internationally it's a very different phenomenon -- fantastic question. I think because people mix up store openings. In the U.S., we're done with store opening. I would say the chains have done a much better job growing their revenues without opening a lot of stores. And we'll talk about that for a little bit.

Even though I will contradict myself at the end of my speech to you -- on the international side, store opening is the driver. You look at Subway opening up 100 stores in the Middle East. You're looking at the huge expansion of Yum in China and Asia. You look at our customer in Tel Aviv or [Polla Compara], taking -- going from Central America into Asia, into the Middle East. You look at the expansion in Europe of some of our chains. We're feeling pretty strongly about the store opening.

And the biggest thing that is helping us now is the dollar being so low and continues to -- it seems every day the same story is the same; the dollar keeps on getting weaker. And it's a great opportunity for us. So we are being very opportunistic. The key what we're doing right now, and I have to tell you that Middleby is taking advantage that -- I have told our people, I just came back from the Milan show where our booth was very successful, extremely successful, because our product looked durable, different than any other product. It's very strong. And the dollar is -- it's a value proposition right now.

We have one-third of our employees live and work overseas. So we are very committed to our international infrastructure. I told our people, it might be another five years or three years that the dollar will change. The key is to create the same brand we've created in United States to take advantage of letting our customers who never experienced our product, never before. And we're selling in places that we haven't sold before -- in Europe, in the Middle East, where mostly Italian and German companies were more predominant. But because of the dollar being low, I've told our people, make sure that the experience is sustainable and lasting. So when the dollar turns against us, we have a sustainable business; not only with the U.S. chains but with local customers in general markets.

And that is basically the mission of what we're doing. We're taking advantage of investing internationally to make sure that one day when the dollar switches and becomes expensive, people who use our product are very happy with us. This is why we are in the process of expanding and have expanded our [knock-over warranty] worldwide, to make sure that people have very, very unique experience with us, not only because it's a value proposition today.

Thank you, Selim.

I would like to add something, unless -- is there any other question?

Yes. You have a question from Greg Halter, Great Lakes Review.

I had a question for you regarding the Bloomfield acquisition, more on the beverage side. What are you envision your plans there? What do you want to do with that company?

I have to say we don't know. I think on this one, I would be honest with you, we are not expert on coffee. The coffee business is very, very strong. I know it's a great opportunity, it's a great market, but at this moment we acquired it as part of the acquisition of Wells. It came with it. We like it. It's not -- it's a very strong brand name. We need to learn that business. And sometimes we need to be telling you, while we know a lot of other things and this one we need to learn about it. We're learning very fast. I don't know what -- I mean, there are other big players in that business. And we need to see what we do with it.

We've been busy, honestly, Greg, we've been busy launching 11 new products. It's our whole disruptive. We've launched the Mini WOW. We'll talk about this in a little bit. I think when it comes to the Bloomfield acquisition, I think it is a great acquisition because that market is growing. It's booming, not only in the United States. Just to tell you how booming it is, American coffee is now even available -- I just came from Milan -- it's even available now in many restaurants in Italy. They offer you espresso, cappuccino or you want American-style coffee. So, I think coffee is on the rise worldwide. It will be even rising in China at one point.

And my feeling is, it's not a great -- bad acquisition. It's not yet -- we don't understand it. So for me to tell we're expert on that would be foolish. Ask me that question in another six months and we'll tell you what you've learned.

All right, I will do that. And, Tim any idea how much steel costs are up on a year-over-year basis? And what is the outlook for steel going forward?

Steel is up for us probably about 25% from where we were a year ago, kind of on an average between all the different grades of steel. It stabilized somewhat in the third quarter. We saw some grades of steel pulling back a little bit, although it's substantially higher from where it was a year ago but starting to come back a little bit. But other grades are increasing. So it is kind of a mixed bag right now. But it's a little bit more stable than it was in the first half of the year where we had a sharp rise in steel from January to June. So it's kind of flattened out at a higher level.

And looking at your tax rate for 2008, do you have any sort of figure there yet or is 39% approximately a good area to model out?

I think typically we were kind of in the 39%. However, with some of the acquisitions we've been pulled into a number of other states. So we're kind of evaluating where we're going to be right now.

Okay. And I know your capital spending is normally low. Just wondering what you envision capital needs going forward, if you expect to remain in that $2 million, $3 million, $4 million area on a go-forward basis?

Yes, I would say that we'd still be in that same range, the $2 million to $4 million range.

All right. And one last one. Is there any way you can quantify how much the work stoppage detracted from operating income in the quarter?

Including the charge that we had, that number was something that was probably approaching $3 million.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS). Scott Gaffner, Lehman Brothers.

Hi, Joel Tiss filling in for him today. How you doing? I'm sure the answer is pretty obvious, but the receivables and inventories up 35% and 45% -- is that just acquisitions?

Yes, it's acquisitions. I mean, the Company's DSOs and inventory turns haven't really changed, so it's mostly acquisition driven. And I indicated earlier what that amount was. I can -- it was -- the increase, $14.7 million of it from the end of the year till now for Accounts Receivable was acquisition related, and then $16.5 million of the inventory was acquisition related.

Okay. And just quick, on the food processing division, how long do you think the culling of the customers, the reduced volume is going to last?

I'm sorry. Could you repeat that?

Could you repeat that, Joel?

Yes, on food processing, you're trying to weed out some of the lower margin business. I just wondered how long?

No, I think we're kind of through the process now. We went through a lot of that last year. And then you kind of have a year to lap it plus the lead times in that business are a little bit longer. But we expect that we've kind of done that one year lapping. So, I would say now whatever growth that we have out of that business is going to be more on a comparative basis.

Okay. And the last one, just can you give us a little bit of an idea -- I guess we've gotten bits and pieces, but can you just step back and talk about the competitive landscape and what you're hearing from the customers? Maybe more zero in on the casual area, because that seems to be maybe most associated with consumers? Thank you.

On the competitive landscape, I think that on one hand we internationally we continue to make a lot of inroads because of our global infrastructure. So as Tony Brenner mentioned before, we have a unique infrastructure. Our international continues to be very strong. So we're getting market share over our competitors there.

We have also continued to be looking at trends. And I look at whether it's a wall oven or the Mini WOW or the Rocket Fryer or the ventless hoods or our redesigned combi ovens; those are multimillion dollar initiatives over the next three years they'll start coming out. So we have a lot of phenomenal product coming in.

Just to give you a perspective, when we introduced the wall oven -- and that's a number that we need to talk about -- we have introduced the wall oven. And people ask what is the impact of that? In the last 15 months since the introduction of the wall oven, we've picked up $18 million of business -- 18 -- one eight. And we continue to see the wall oven growing. We are very concerned about this margin. We need to make sure that we don't give it away because this is a very disruptive product. It allows speed. It allows huge energy, so payback is here. The quality of the pizza, it's certifiably better than using any of our ovens or our competitor's oven. So we've done very, very well with that. And the question is continuing to push ahead with all disruptive technology that differentiates us from our competitors.

On the casual dining side, I would say there is definitely a casual dining malaise. But many of our customers I talked to -- Applebee's, Chili's, Red Robin -- seem to have accelerated their unit expansion. And I would have to tell you something else which is interesting for me. As I talked to our customers, of course they have a hostile economic climate and they are looking at same-stores growth to be sluggish.

But there is something they are doing interesting. They are, a lot of them, are growing the bottom line by assigning more franchisees. So growing unit sales is a lesser priority and they are transferring much of the downside risk of the slowing economy to their franchisees. And the franchisee seems to be not affected by the economic climate because they are more nimble and much smaller. They can weather those changes. And just to give you a perspective of that, Papa John announced that they were waiving their franchise fees in selective markets; in selective markets for a limited time to sign up franchisors -- franchisees. You look at companies like Buffet's is seeking franchisees to launch their hometown buffet. You're seeing even rumors that many of the corporate stores owned by big chains are going to turn away those stores and sign -- and turn them over to franchisee, who will update them, remodel them and renew them. I think that's one.

There's also another interesting thing happening in the casual dining. There is a competitiveness right now and anxiety to get the corner on this prime real estate while the opportunity still exists. So many of the best high traffic area has gone and now are gone. And many of our customers are looking at opportunities to buy into new developments that are hot. So they are not saying, well, economically it's bad and I'm going to miss this so my competitors take it.

So we're seeing some of this occurring in this country when I talk to the casual dining. They say, you know what? We can't stop; we need to continue. And the good companies tend to take market share in a down turn. They change their menu, they remodel, they start going and buying location that bad operators, smaller operators had. They take them over.

Remember, I've been in this business for 25 years. I have managed -- I've been in a key position for most of those years. And I've been able to see three slowdowns. And I've seen the good operators get better and they manage through this extremely well. The bad operators will go away. And I'm not going to name the few today that in my opinion, if I have to predict, I will tell you some operators will go out of business. And we know who they are. We have not teamed up with them. Our customers are very blue-chip restaurant operators and we are very, very strong with them and they're going to continue managing this very, very well.

Bill Priebe, Geneva Capital Management.

Congratulations. I happened to see a presentation by TurboChef at a small growth conference in New York. They thought very highly of your firm, by the way. But I'm wondering how big of a competitor are they in certain areas of your operations? And has it led in any way to market share changes or price competition that heretofore didn't exist?

Bill, we would like to respond the same comment they gave to us to them. I think we are the most probably the few companies in this industry that are creating disruption. I think TurboChef has done a great job creating disruption in their marketplace and we have.

We have not truly crossed right now. They introduced a pizza oven at the Pizza Show. They have one model, one size. We're not concerned by it. I think their core business, which is that TurboChef oven that toasts in less than a minute, is most probably their core business. And they've done a very good job with it. We do not see ourself competing with them at all.

At one point originally I thought we would. And it does not. You look at Subway -- let's take a customer that we have together. They have helped us expense our businesses because as they've helped Subway grow their business, Subway is looking at now speed in their bread oven. And we're working with Subway on looking at new ways of getting more of their bread ovens.

So, in many ways we'll be complementary in this business. We've helped each other in many ways. They have Starbucks; we don't do much with Starbucks. We don't do anything with Starbucks. I don't see ourselves competing much. But they've disrupted the business and they focused on speed. So, they've helped us in our business to learn people that speed is important.

Sounds like a possible acquisition candidate if they were so interested.

Oh, there's no doubt that it's complementing there. I don't know if it's a possible acquisition. I don't know what their plans are and we haven't talked about that much other than we think of their management with -- similar to ours. They are very focused on what they do. And I need to plug in and say we respect them a great deal. I think their management is -- their owners, the Chairman, the President and the operating guys are fabulous. And we welcome companies like this because they make the industry better. And it's fantastic.

Thank you very much.

Yes. I would like -- is there any other questions?

No.

On this I'm going to come back and remind people why Middleby is unique. I'm going to share with you -- just if you'd bear with me -- to look at the past I would say, I'm counting, the past six years.

In 2002, Middleby had just bought -- we were just on the heels of September 11. The economy was pretty bad. The hotel business was decimated. People were not eating out. They were concerned, what's going on. And the dot.com had exploded. And we're talking about war with Iraq. We started talk about war with Iraq. 2002 -- Middleby managed that very well.

In addition, in one of our biggest markets in the UK, we got hit by Mad Cow Disease, which affected -- everybody started being concerned about what's going to happen? Is it going to transgress and come to this country? And that affected many of our operators.

In 2003, we got hit by SARS and followed very quickly by bird flu in Asia -- our biggest emerging market at the time. In 2004/2005, we got hit by two things -- we got hit by what I call the carb craze. People anti-carbs. The Atkin's, the South Beach, The Zone. You name it. I don't even remember how many books were written about not eating carbs. And Middleby sells pizza ovens and bread ovens and whatsoever. And we were able to weather that. In the meantime, we got hit by Katrina in one month in our biggest market in Southeast, Florida and the Gulf Coast. And we weathered that.

2006, we got hit by huge, big stainless steel issues; major. It hit us significantly overnight. 2007, we had a strike; a lockout and a strike that occurred in our Elgin facility, and we still reported a very strong quarter.

I give credit on this conference call to my management team, to our structure, to being decentralized, and that's what you expect from Middleby. You will not have any excuse of weather or strike; whatever. That's one thing I can promise you, that we'll work hard for our investors and our shareholders, to continue anticipating trends, to continue introducing 11 to 12 new products that are disruptive, and to integrate acquisitions the way we've done them; very, very fast. Thank you.

Okay. And thank you, everybody, for joining today's conference call. I think that's it. And we look forward to speaking to everybody next quarter.

Thank you. This concludes today's conference call. You may now disconnect.